Chancellor retains state pension triple lock

State pension is set for a record-breaking increase from April 2023.

If you’re currently receiving or have been looking into the State Pension, then you’ve probably heard of the ‘triple lock’. But what is it?

The triple lock was introduced in 2010. Its purpose is to make sure that the State Pension doesn’t lose value over time. The triple lock aims to protect pensioners against the impact of inflation. If the State Pension didn’t change but the price of goods and services continued to increase over time, then you wouldn’t be able to buy as much with it. Meaning you’d be losing money in real terms.

In the 2022 Autumn Statement, the Chancellor confirmed that the triple lock will be reinstated from 6 April 2023. This means the State Pension will rise in line with last September’s inflation rate – 10.1% – in the 2023/24 tax year. Anyone receiving the State Pension will benefit from the triple lock.

To make the guarantee even more secure, it included three separate measures of inflation, hence ‘triple lock’. The three-way guarantee was that each year, the State Pension would increase by the greatest of the following three measures: average earnings; prices, as measured by the Consumer Prices Index (CPI) and 2.5%. The government usually compares the three rates in September, before implementing the correct rise the following April.

The State Pension triple lock has proved to be a burden for successive governments, as it has proven costly for the taxpayer. Because of people earning much less during the lockdowns of 2020, there was a big leap in average earnings of 8% come 2021 as people returned to work. The government announced that the triple lock would be suspended for the 2022/23 tax year.

No ‘one-size-fits-all’ protection solution

Helping you feel confident your family’s finances are secure.

With a New Year comes resolutions. Everyone should make a resolution to review their protection and estate plans. A solid plan will help you feel confident your family’s finances are secure.

The uncertainty of the past couple of years has shown how important it is to have a robust plan in place for securing your family’s finances. While no one knows what is around the corner, reviewing your protection, updating your Will and creating an estate plan will help you rest assured that the financial side of things is taken care of.

These are some of the main considerations:

Protect against illness and death

It is essential to make sure that you have adequate protection in place, depending on your particular circumstance. There is no ‘one-size-fits-all’ protection solution so receiving professional advice is important when considering the right products for you and your family’s needs. This will ensure that your finances remain secure if illness or death happens unexpectedly, giving peace of mind to you and your loved ones at what could otherwise be a difficult time.

A life insurance policy is one of the most important types of protection to have in place. It pays out a lump sum if you die during the duration of the policy, helping your family to pay off their debts, maintain their lifestyle or cover any other expenses they may have.

Critical illness cover can also provide valuable financial protection in case you are diagnosed with a specified serious illness while your policy is active. This type of cover will pay out a tax-free lump sum if you are diagnosed with an eligible condition, allowing you to concentrate on getting better without having to worry about bills piling up.

Income protection is also worth considering when developing your financial plan. This type of cover provides regular payments should you become ill or injured and are unable to work. This can help you cover your regular outgoings, such as mortgage payments or rent, while you recover.

Write or review your Will

Writing or reviewing your Will is essential for making sure that your wishes are respected and carried out after you pass away. It ensures that your money and other assets go to the people and causes you care about, such as relatives, family friends, charitable organisations, etc. Additionally, it provides you with the opportunity to appoint guardians for any children in your life, so they can be looked after by people you know and trust.

If you don’t have a Will in place when death occurs, then the rules of intestacy will be applied to distribute your assets and possessions according to legal guidelines. These might not always align with what you would have wanted. Therefore, it is important to obtain professional advice on how best to proceed with making a professional Will. Doing so can help to ensure that your wishes are appropriately recorded and respected, even after you’ve gone. With the right professional advice and guidance, writing or reviewing your Will provides peace of mind that comes with having your affairs in order.

Create an estate plan

Creating an estate plan is a step that can make a significant impact on the financial futures of your children and grandchildren. Despite common misconceptions, estate planning isn’t only for the wealthy. In fact, due to rising house prices and the freezing of the Inheritance Tax (IHT) nil-rate band until April 2028, IHT could now be more impactful than before.

Fortunately, there are various ways in which you can minimise this unexpected burden, ranging from making lifetime gifts to utilising pensions and trusts. To get the most out of these options, it’s best to seek professional financial advice. We can help guide you as you build a comprehensive estate plan tailored specifically to your needs, to ensure that your family is well-protected and their financial futures are secured.

Leaving a tax-efficient legacy

Considering the rule of seven when making financial gifts.

You’ve worked to build up your wealth. But now it’s time to make plans so your loved ones can get the most from the estate you intend to leave behind. If you think you might be affected by Inheritance Tax, it can be tempting to hold off making plans to do anything about it. But the truth is that it’s better to plan earlier for Inheritance Tax.

Estate planning is an essential element of preparing your finances for when you are no longer around but want to make sure that as much of your estate as possible is exempt from Inheritance Tax. Current thresholds are frozen until at least 2026, so it’s likely more estates could trigger a 40% Inheritance Tax bill over the coming years.

Inheritance Tax planning options

On your death, the first £325,000 nil-rate band (2022/23) of your estate is exempt from the 40% Inheritance Tax. However, you can also make financial gifts that will reduce the value of your estate when you die. For those who have accumulated a reasonable amount of wealth and who have children, the seven-year rule can be taken full advantage of.

This is one of the most popular, and cost-effective, Inheritance Tax planning options relating to gifting some of your wealth to loved ones before you die. The idea being that the people who matter to you most could start to benefit from some form of inheritance earlier.

Gift reduces each year

It also reduces the value of your estate. Meaning, when it’s assessed for Inheritance Tax, your potential liability could prove lower. Or, even better, you don’t have one at all. In order for bigger financial gifts to be fully exempt from Inheritance Tax, you need to live for at least seven more years.

If you die within seven years of making the gift, it is still considered part of your estate and it will be included in your Inheritance Tax assessment.

If you die between three and seven years, you would still have to pay some tax on the gift if it exceeded the available nil-rate band. The amount payable on the gift reduces each year once you have survived the gift by over three years. Only after seven years is the full gift no longer part of your estate for Inheritance Tax purposes.

There are many ways you might be able to reduce (or even eliminate) a potential liability. But the longer you wait, the more expensive some of these options might prove.

It goes without saying that none of us knows when our time will come. That’s why it can really help to start making plans now. Doing so could help you maximise the amount of inheritance you leave to loved ones.

INHERITANCE TAX PLANNING IS A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

PROFESSIONAL FINANCIAL ADVICE SHOULD BE OBTAINED BEFORE TAKING
ANY ACTION.

INHERITANCE TAX PLANNING IS A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING. THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE INHERITANCE TAX PLANNING.

Doing the right thing for the planet

Four in five looking to change jobs demand green pensions.

When you first start paying into your employer’s pension, your contributions, along with employer contributions and tax relief, will be invested through a default fund. You will usually have several fund options to choose from.

Increasingly, new research has identified that people are choosing to work for employers that provide ‘green pensions’[1]. Today’s workers expect employers to show true leadership and offer pensions which are invested responsibly.

Investments in high ESG-risk sectors

Demonstrating a genuine commitment to environmental, social, and governance (ESG) priorities is not only the right thing to do for the planet, it could also be a game changer for attracting and retaining the best talent. Business leaders have a real opportunity to show staff that they are serious about doing the right thing.

Many companies remain unaware of how their current employee pension schemes can undermine the progress they are making to develop more sustainable operations, primarily due to sizeable investments in high ESG-risk sectors such as coal, oil sands and tobacco.

One of the top four benefits

The data reveals the views of employees and employers relating to sustainable workplace policies and individual practices. Across the UK workforce, eight out of ten employees (83%) view climate change as an important issue – expecting their employer to take an active stance on ESG issues and implement sustainable workplace practices.

One quarter (24%) of employees cited support for more sustainable personal finances – including green pensions – as one of the top four benefits that they expect from a new employer, alongside flexible working (48%), cost of living support (39%) and an attractive holiday package (34%).

More sustainable pensions

72% of workers said that it was important their employer invests their savings sustainably, as part of their organisation’s overall stance on critical environmental and social issues. With a third (32%) of workers currently seeking new employment – and a further quarter (24%) planning to apply for new jobs in the next year – the data suggests that the provision of more sustainable pensions may provide a new way for employers to attract and retain talent.

Despite this sizeable employee demand, only a quarter (25%) of employers claim to be knowledgeable about green pensions. More than a third (37%) of employers claim to not know anything about them or have never heard of them.

Social and governance outcomes

In fact, nearly half of employers (43%) identified a green pension as a fund that avoids investments in highly polluting industries, such as oil or thermal coal projects. But only a fifth of employers (22%) acknowledged the social and governance outcomes, such as the equitable treatment of workers or promotion of gender and racial diversity on corporate boards (17%).

With over a third (34%) of employers admitting they don’t currently offer a sustainable pension scheme to their employees, there is a significant commitment gap on implementing workplace policies that positively impact ESG issues.

Source data:
[1] Make My Money Matter, FTSE100 Research, September 2022

Don’t abandon pension contributions as prices rise

Savers could miss out on thousands of pounds in retirement.

As the cost of living continues to soar, with inflation reaching a 40-year high, the impact on household finances is taking its toll. But it is essential to try to maintain a savings habit even in the current climate. The impact of any breaks in pension contributions could mean savers miss out on thousands of pounds in future that will mean less income during retirement.

Research has highlighted that reducing or stopping pension contributions, even for a relatively short period of time, can have a significant impact on the final pot, with savers potentially being thousands of pounds less well off in retirement as a result[1].

Having an even bigger impact

For example, someone who began working with a salary of £25,000 per year and paid the standard monthly auto-enrolment contributions (3% employer, 5% employee) from age of 22, would have a total retirement fund of £456,893 at the age of 68.

However, stopping pension contributions at the age of 35 for just one year, would result in a total pot of £444,129 – almost £13,000 less than if they had not stopped paying in. Stopping contributions for a longer period would have an even bigger impact.

Risk of sacrificing savings to cover everyday expenses

While currently relatively low, the risk of sacrificing savings to cover everyday expenses continues as long as these challenging circumstances go on. Almost all (93%) say that increasing costs and high inflation are going to impact, or are already impacting, their financial situation.

If possible, the first port of call should be to reduce spending, for example, cutting back on unnecessary purchases and shopping around for better value deals. Doing this, rather than making decisions that will affect future finances such as reducing or stopping pension contributions, even if for a short period only, will be beneficial in the long term.

Tips for potential spending cutbacks in the current environment

1. Review your expenditure for potential areas of savings – By looking through your monthly outgoings, you may find there are ways to make savings. Do you have any subscriptions or memberships that you no longer use and could cancel or pause? Do you spend a lot of money on things that are a luxury, such as takeaways? Taking some of these small steps could make a difference.

2. Shop around for better deals – You may be able to switch household providers and find cheaper deals, such as for broadband or your mobile phone. Many providers have package deals for new customers so it’s worth using a price comparison website to see if there are savings to be had.

3. Set budgets – To help you keep an eye on your outgoings, it is a good idea to set a budget for things like food shopping and socialising so you don’t spend more than your means.

Source data:
[1] Research conducted among a sample of c.2,600 contactable Standard Life customers between 9–22 May 2022. Calculations are intended for the sole purpose of providing an illustration regarding the projection of savings and pensions. They should not be used with the intention to give an accurate representation of real world outcomes.

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Month: January 2023